MODULE 14

THE CONVERSION CYCLE

Value Stream Mapping

 Value Streams (a.k.a. value chains) are process maps that decompose production and
related activities Into processes that add specific value to a product
 Value stream accounting attempts to measure costs associated with value stream elements
and match them to related product value attributes, for example
– Are you spending $100 to add $20 worth of value In an "optional feature" of your
product.

Value Stream Mapping Pros and Cons

 VSM Is best applied to repetitive high -volume production processes with linear
relationships among production steps and among product components
– VSM helps to Identify bottlenecks and Inefficiencies
– VSM focuses attention on areas where eliminating or redesigning processes will
yield maximal benefit
 VSM works poorly when product configuration can vary significantly and when value In
a "selling price" sense Is difficult to trace to specific production activities - for example,
– what are the value stream elements of a production facility that produces both
economy and luxury vehicles?
– what are the value stream elements that generate Improved vehicle reliability?
 VSM Is more relevant to high-level planning and management control than to day-
to-day production and related transaction processing and financial records

Lean Manufacturing
 Lean Manufacturing - a set of manufacturing principles and techniques that attempt to
minimize resource Inputs, Increase flexibility, and shorten production time - often with
significant application of computer and Information technology
 Key principles and techniques
– Demand-driven (pull processing) production
 Continuously measure demand (convert from batch to make-to-order
production where possible)
 Schedule production to meet measured demand quickly and precisely
– Zero defects
 Design production processes to eliminate defects In final products
 Detect WIP defects as early as possible
 Employ production processes that guarantee few or zero defects
  Minimize use/waste of time, materials, and other resource
– To some extent, a natural consequence of previous two principles:
 Don’t produce what Isn't known to be sellable
 Don’t waste anything to produce the product
– Choose production methods and technology that maximize production speed and
efficiency
 Just-In-time Inventory
– Minimize stocking of raw materials and other production Inputs
– Make suppliers your partners:
 Integrate Information systems to coordinate their production with your
scheduling and ordering
 Co-locate production facilities to minimize transport time and cost
– Reduce or eliminate set-up time - choose production processes than can be
reconfigured for new products or models as quickly as possible

Computer-and Software-Related Production Terminology

 Computer-aided design (CAD) - computer modeling of products or production processes-
used to:
– Speed design/development
– Improve quality
– Digitally Integrate R&D with engineering
– Create automated Inputs to CAM
 Computer-aided manufacturing (CAM) - use of computers/software I to
Implement/control manufacturing - e.g.,
– program robotic assembly based on CAD part and product models
– automated movement of materials and WIP
– automated process monitoring and control

More Computer - and Software-Related Production Terminology

 Materials resource plan (MRP) - short-term automated purchasing, scheduling and
Inventory control
 MRP - 2 - adds medium- and long-term
 Enterprise resource planning (ERP) - Integrated application software suite with "modules'
for functional areas (e.g., MS Dynamics and SAP)
 Computer Integrated manufacturing (CIM)
– Textbook: CAD plus CAM plus ERP
– Generic: Synonym for CAM
 Just-In time production - Integrated sales order capture with CAM, MRP, and JIT
purchasing and Inventory control
Conversion -Related Financial Statement Frauds
 Conversion-related risk areas for financial statement fraud Include:
– Allocation of fixed costs
– Capital vs. operating costs
– Valuation of Inventory
 Fixed costs Issues:
– Most manufacturing firms have high fixed costs
– Fixed costs are allocated to WIP and finished goods Inventory via formulas based
on estimates:
 Fixed costs not yet allocated are an expense (Income statement Item)
 Fixed costs already allocated are either an asset (WIP or FG Inventory) or
a cost matched to a revenue stream (COGS)
 Since financial statement ratios are common analysis tool used by analysts and Investors,
management can manipulate the ratios (choose which ones to "Improve" at the expense of
others) by manipulating fixed cost allocation estimates and production timing

Classification Issues
 Costs can be shifted from the Income statement to the balance sheet by Incorrectly
classifying operating expenses as capital expenses - e.g.,
– Classify an expensive repair as a capital Improvement
– Replace an obsolete machine with positive book value but don’t dispose of the old
one and keep It "on the books"
 Inventory valuations can be manipulated by mislabeling and other means, e.g.,
– Counting rework not yet completed as finished goods
– labeling a shipping carton of 3G phones as 4G phones

ACTIVITIES
1. computerization of the conversion process results In all except:
a. automatic computation of materials requirements based on purchase orders.
b. timely transfer of Inventories throughout the process
c. automatic updating of Inventory status reports
d. automatic computation of materials requirements based on sales orders

2. Select the false competition to the statement which starts "A computer-based conversion
process."
 a. requires less data Input Into the system
b. automatically prepares financial accounting entries and cost accounting reports.
c. yields greater benefits In terms of workforce efficiency
d. permits more systemic scheduling which allows for greater flexibility.

3. Select the true statement.

a. computer-aided manufacturing (CAM) requires computer-aided design.
b. computer-aided design Is always two dimensional.
c. computer-aided design may be three dimensional.
d. computer-aided design requires additional manpower during assembly.

4. Just-In-time (JIT) production systems:

a. require close communications with the engineering department
b. do not require close communications with vendors.
c. require closely controlled Inventory levels
d. do not require additional monitoring

5. the act of misstating financial Information In order to Improve financial statement results Is
referred to as:
a. just In time production systems
b. manufacturing resource planning
c. earnings department
d. absorption costing